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ITA Chapter 4 P2

Deductions from income from house property

  1. The income under the head “Income from house property” shall be computed after making the following deductions:—
    1. 30% of the annual value as determined under section 21;
    2. where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital;
    3. where the capital referred to in clause (b) is borrowed during any period prior to the tax year in which the property has been acquired or constructed, the amount of any interest payable for the said prior period in five equal instalments for the said tax year and for each of the four immediately succeeding tax years.
  2. In case of property or properties referred to in section 21(6), the aggregate amount of deduction under 6[sub-section (1)(b) and (c)] shall not exceed—
    1. ₹ 200000, subject to the following conditions:—
      1. the property has been acquired or constructed with borrowed capital and such acquisition or construction is completed within five years from the end of tax year in which capital was borrowed;
      2. the assessee furnishes a certificate from the person to whom interest is payable on such capital;
    2. ₹ 30000 in any other case.
  3. The deduction under section 22(1)(c) shall be computed after reducing the interest referred to in the said section by any amount already allowed as a deduction under any other provisions of this Act.
  4. The certificate referred to in sub-section (2) shall specify—
    1. the amount of interest payable on capital borrowed; and
    2. the interest payable on any new loan, where subsequent to the capital borrowed, the assessee has taken any such loan for repayment of whole or any part of such capital.
  5. The aggregate of the amounts of deduction under sub-section (2) in respect of properties of the nature referred to in section 21(6) shall not exceed ₹ 200000.
  6. Any interest chargeable under this Act which is payable outside India shall not be allowed as a deduction under this section, if—
    1. tax has not been paid or deducted on such interest under Chapter XIX-B; and
    2. in respect of such interest, there is no agent in India as per section 306.

Arrears of rent and unrealised rent received subsequently

  1. The amount of arrears of rent received by an assessee from a tenant, or the unrealised rent realised subsequently from a tenant, shall be deemed to be the income from house property in respect of the tax year in which such rent is received or realised.
  2. The amount deemed to be income from house property under sub-section (1) shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that tax year.
  3. A sum equal to 30% of the arrears of rent or the unrealised rent referred to in sub-section (1) shall be allowed as deduction.

Property owned by co-owners

  1. For property co-owned with definite and ascertainable share, the co-owners shall not be assessed as an association of persons and their income computed separately under this Part as per their respective share shall be included in their total income.
  2. The relief available under section 21(6) shall be provided as if each co-owner is individually entitled to the said relief.

Interpretation

For the purposes of sections 20 to 24, the “owner” in relation to a property or any part thereof shall include—

  1. an individual who transfers without adequate consideration, any property to the spouse (except under an agreement to live apart), or to a minor child (other than a married daughter);
  2. the holder of an impartible estate, and he shall be deemed to be an individual owner in respect of all the properties comprised in the estate;
  3. a member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association;
  4. a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882);
  5. a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or its part—
    1. by virtue of transfer of such property by way of sale or exchange or original or extendible lease for a term of not less than twelve years; or
    2. accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease which has the effect of enabling the enjoyment of such property.

Income under head “Profits and gains of business or profession”

  1. The incomes referred to in sub-section (2) shall be chargeable to income-tax under the head “Profits and gains of business or profession”.
  2. The income under sub-section (1) shall include—
    1. the profits and gains of any business or profession carried on by the assessee at any time during the tax year;
    2. any compensation or other payment, due to, or received, by any person by whatever name called,—
      1. wholly or substantially managing the affairs—
        1. of an Indian company; or
        2. in India, of any other company; or
      2. holding any agency in India for any part of business activities of any other person; or
      3. for any contract relating to business,

      in connection with termination of management, office, agency or contract, as the case may be, or modification of terms and conditions relating thereto;

    3. any compensation or payment, due to, or received by, any person for vesting of the management of any property or business, in the Government including any corporation owned or controlled by the Government under any law in force;
    4. income derived by a trade, professional or similar association from specific services performed for its members;
    5. profits on sale of import licence, cash assistance against export, duty drawback or duty remission or any other export incentive, received or receivable;
    6. the value of any benefit or perquisite arising from business or the exercise of a profession, whether—
      1. convertible into money or not; or
      2. in cash or in kind or partly in cash and partly in kind;
    7. any interest, salary, bonus, commission or remuneration, by whatever name called, which is due to, or received by, a partner of a firm from such firm to the extent allowed under section 35(e) as a deduction in computing the income of the firm;
    8. any sum, received or receivable, in cash or in kind—
      1. under an agreement for not carrying out any activity in relation to any business or profession, not being—
        1. any sum received on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession which is chargeable under the head “Capital gains”;
        2. any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, as per the terms of agreement entered into with the Government of India; or
      2. under an agreement for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature, or information or technique likely to assist in the manufacture or processing of goods or provision for services;
    9. any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy;
    10. the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the manner, as may be prescribed; and
    11. any sum which is received or receivable in cash or kind, when—
      1. a capital asset other than land or goodwill or financial instrument, is demolished, destroyed, discarded or transferred; and
      2. the whole of the expenditure on it has been allowed as a deduction under section 35AD of the Income-tax Act, 1961 (43 of 1961) or section 46 of this Act.
  3. Where speculative transactions carried on by an assessee are of such nature to constitute a business, the business (herein referred to as speculation business) shall be deemed to be distinct and separate from any other business.
  4. Any income from letting out of a residential house or a part of it by the owner shall not be included in income under sub-section (1) and shall be chargeable only under the head “Income from house property”.

Manner of computing profits and gains of business or profession

The income referred to in section 26 shall be computed as per the provisions of sections 28 to 60, except section 58.

Rent, rates, taxes, repairs and insurance

  1. The following amounts shall be allowed as deduction in respect of premises, machinery, plant or furniture used for the purposes of the business or profession:—
    1. any premium paid in respect of insurance against risk of damage or destruction thereof;
    2. land revenue, local rates or municipal taxes paid;
    3. rent paid, when the premises are occupied by the assessee as a tenant;
    4. amount paid on account of current repairs to the premises, not being in the nature of capital expenditure, when the premises are occupied by the assessee otherwise than as a tenant;
    5. amount paid on account of cost of repairs, not being in the nature of capital expenditure, when the premises are occupied by the assessee as a tenant and where he has undertaken to bear the cost of repairs to the premises; and
    6. the amount paid on account of current repairs to machinery, plant or furniture, not being in the nature of capital expenditure.
  2. In case where the premises, building, machinery, plant or furniture is partly used or not wholly and exclusively used for the purposes of the business or profession, the deduction allowable under sub-section (1) shall be restricted to the fair proportionate part thereof as determined by the Assessing Officer, having regard to the usage for the purposes of the business or profession.

Deductions related to employee welfare

  1. The following sums, in the case of an assessee being an employer, shall be allowed as deduction in computing income chargeable under section 26:—
    1. any sum paid by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to—
      1. such limits, as may be prescribed, for recognising the provident fund or approving the superannuation fund; and
      2. such conditions, as the Board may specify, for cases where the contributions are not made annually either as fixed amounts, or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or the contributions or to the number of members of the fund;
    2. any sum paid by way of contribution towards a pension scheme referred to in section 124, for an employee up to 14% of the salary of the employee in the tax year, where such salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;
    3. any sum paid by way of contribution towards an approved gratuity fund created by the assessee for the exclusive benefit of his employees under an irrevocable trust;
    4. irrespective of anything contained in sub-section (2), any provision made for the purpose of making contribution towards approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the tax year;
      1. the amount of contribution received from an employee to which the provisions of section 2(49)(o) apply, if it is credited by the assessee to the account of the employee in the relevant fund or funds by the due date;
      2. for the purposes of sub-clause (i), “due date” means the date by which the assessee is required as an employer to credit employee contribution to the account of an employee in the relevant fund under any Act, rule, order or notification issued under it or under any standing order, award, contract of service or otherwise and the provisions of section 37 shall not apply for determining the “due date” under this clause.
    1. Subject to the provisions of sub-section (1)(d), no deduction shall be allowed for any provision made for the payment of gratuity to the employees on their retirement or termination for any reason; and
    2. in case deduction has been allowed for any provision made under sub-section (1)(d), then no deduction shall be allowed on actual payment made from such provision.
  3. No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under sub-section (1)(a) or (b) or (c), or as required by or under any other law in force.

Deduction on certain premium

The following sums shall be allowed as deduction in computing income chargeable under section 26, being premium paid:—

  1. by any assessee in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of business or profession;
  2. by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society;
  3. by the assessee as an employer, through any mode of payment other than cash, to effect or to keep in force an insurance on the health of its employees under a scheme framed in this behalf by—
    1. the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government; or
    2. any other insurer and approved by the Insurance Regulatory and Development Authority established under section 3(1) of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).

Deduction for bad debt and provision for bad and doubtful debt

  1. The amount mentioned in column C of the Table below, in respect of any provision for bad and doubtful debts made by the assessee specified in column B thereof, shall be allowed as a deduction in computation of income chargeable under section 26.
  2. Any amount of bad debt, or part of it, in the tax year in which such amount is written off as irrecoverable in the accounts of the assessee, shall be allowed as deduction in computation of income chargeable under section 26, subject to the following conditions:—
    1. it has been taken into account in computing the income of the assessee of the tax year in which it is written off, or any earlier tax year, or represents the money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee;
    2. if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the tax year in which the ultimate recovery is made; and
    3. where it relates to an assessee to which sub-section (1) applies,—
      1. only that amount which exceeds the credit balance in the provision for bad and doubtful debts account made under that sub-section shall be allowed as deduction;
      2. such amount shall be allowed only when the assessee has debited any amount of bad debt or part thereof in that tax year to the provision for bad and doubtful debts account made under that sub-section; and
      3. the aforesaid account shall be only one such account under sub-section (1) and such account shall be related to all types of advances, including advances made by rural branches.
  3. For the purposes of sub-section (2),—
    1. any bad debt or part of it written off as irrecoverable shall not include any provision for bad and doubtful debt;
    2. any amount of bad debt or part of it, which has been taken into account in computing the income of the assessee of the tax year in which the amount of bad debt or part of it becomes irrecoverable or of an earlier tax year as per income computation and disclosure standards notified under section 276(2) without recording it in the accounts, shall be allowed as a deduction in computing the income of the assessee of the tax year in which it becomes irrecoverable and such bad debt or part of it shall be deemed to be written off as irrecoverable in the accounts for the purposes of sub-section (2).

Other deductions

The following amounts shall be allowed as deduction in computing income chargeable under section 26:—

  1. bonus or commission paid to an employee for services rendered, but only when such amount would not have been payable to the employee as profits or dividend if it had not been paid as bonus or commission;
  2. interest paid in respect of capital borrowed for the purposes of business or profession, where—
    1. such interest shall not include interest on capital borrowed for acquisition of an asset, whether capitalised in the books of account or not, for any period beginning from the date the capital was borrowed for acquisition of the asset till the date that asset was first put to use;
    2. recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies fulfilling the conditions as may be prescribed, shall be deemed to be capital borrowed;
  3. contribution paid by a public financial institution to the credit guarantee fund trust for small industries as the Central Government may, by notification, specify;
  4. the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner, as may be prescribed, where—
    1. “discount” means the difference between the amount received or receivable by the infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank issuing the bond, and the amount payable on maturity or redemption of such bond;
    2. “period of life of bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond;
  5. the amount carried to a special reserve created and maintained by a specified entity, subject to the following conditions:—
    1. such amount shall not exceed 20% of the profits derived from an eligible business computed under the head “Profits and gains of business or profession” before any deductions under this clause; and
    2. when the aggregate of such amounts carried to such reserve account from time to time exceeds twice the amount of paid-up share capital and of general reserves of the specified entity, no deduction shall be allowable on such excess,

    and for the purposes of this clause,—

    1. “specified entity” means—
      1. a public financial institution as specified in section 2(72) of the Companies Act, 2013 (18 of 2013);
      2. a financial corporation which is a public sector company;
      3. a banking company;
      4. a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
      5. a housing finance company; and
      6. any other financial corporation including a public company;
    2. “eligible business” means,—
      1. in respect of any of the specified entities referred to in clause (e)(A)(I) to (IV), the business of providing long-term finance for—
        1. industrial or agricultural development;
        2. development of infrastructure facility in India; or
        3. development of housing in India;
      2. in respect of the specified entity referred to in clause (e)(A)(V), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
      3. in respect of the specified entity referred to in clause (e)(A)(VI), the business of providing long-term finance for development of infrastructure facility in India;
    3. “infrastructure facility” means—
      1. an infrastructure facility as defined in Explanation to section 80-IA(4)(i) of the Income-tax Act, 1961 (43 of 1961) or any other public facility of a similar nature as may be notified by the Board in this behalf and which fulfils the conditions as may be prescribed;
      2. an undertaking referred to in section 80-IA(4)(ii) or (iii) or (iv) or (vi) of the Income-tax Act, 1961 (43 of 1961); and
      3. an undertaking referred to in section 80-IB(10) of the Income-tax Act, 1961 (43 of 1961);
  6. any expenditure, not being capital expenditure, incurred by a corporation or a body corporate, by whatever name called, if,—
    1. it is constituted or established by a Central Act or State Act or Provincial Act;
    2. it is notified by the Central Government for the purposes of this clause having regard to the objects and purposes of the Act referred to in sub-clause (i); and
    3. the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;
  7. the expenditure incurred by a co-operative society engaged in the business of manufacture of sugar, on purchase of sugarcane at a price equal to or less than the price fixed or approved by the Government;
  8. marked to market loss or other expected loss as computed as per the income computation and disclosure standards notified under section 276(2);
  9. any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees, subject to the following conditions:—
    1. if such expenditure or any part of it is of capital nature, one-fifth of it shall be deducted for the tax year in which it was incurred and the balance shall be deducted in equal instalments for each of the four immediately succeeding tax years;
    2. the provisions of sections 33(11) and 112(3) shall apply to deduction under this clause as they apply in relation to deductions allowable in respect of depreciation;
    3. the provisions of sections 38(1)(c), 39(4) (Table: Sl. No. 9), 45(6) and (10), shall apply to an asset representing capital expenditure for promoting family planning, to the extent they apply to an asset representing capital expenditure on scientific research;
  10. the amount being difference between the actual cost of animals used for the purposes of the business or profession otherwise than as stock-in-trade and the amount realised from the carcasses or animals, where such animals have died or become permanently useless; and
  11. the amount paid as securities transaction tax or commodities transaction tax, if—
    1. the taxable securities transactions or taxable commodities transactions are entered into the course of the business during the tax year; and
    2. the income arising from such taxable securities transactions or taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.

Deduction for depreciation

  1. A deduction in respect of depreciation of—
    1. buildings, machinery, plant or furniture, being tangible assets;
    2. know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st April, 1998, not being goodwill of a business or profession,

    owned wholly or partly by the assessee and used wholly and exclusively for the purposes of the business or profession, shall be allowed, as per the provisions of this section.

  2. In case of assets referred to in sub-section (1) of an undertaking engaged in generation or generation and distribution of power, the deduction in respect of depreciation shall be such percentage of its actual cost to the assessee, as may be prescribed.
    1. In case of any block of assets, deduction in respect of depreciation shall be such percentage of its written down value, as may be prescribed;
    2. when any building, machinery, plant or furniture is partly, or not wholly and exclusively, used for the purposes of the business or profession, the deduction under clause (a) shall be restricted to the fair proportionate part thereof as determined by the Assessing Officer, having regard to the usage of such building, machinery, plant or furniture for the purposes of the business or profession;
    3. when deduction of actual cost in respect of any machinery or plant has been allowed under section 54, no deduction under this sub-section shall be allowed.
  4. The deduction under this section shall be restricted to 50% of the prescribed rate, if such asset, being asset referred to in sub-sections (2) and (3) is—
    1. acquired by the assessee during the tax year; and
    2. put to use for the purposes of business or profession for less than one hundred and eighty days in that tax year.
  5. The aggregate deduction in respect of depreciation allowable to the predecessor and successor in cases of succession under section 70(1)(zd) or (ze) or (zf), or section 313, or to the amalgamating and the amalgamated company in the case of amalgamation, or to the demerged and resulting company in the case of demerger, as the case may be, for any tax year, shall not exceed the deduction calculated at the prescribed rates under this section as if the succession, amalgamation or demerger had not taken place, and such deduction shall be allowed on pro rata basis based on number of days for which assets were used by the following:—
    1. predecessor and successor, in case of such succession; or
    2. amalgamating company and the amalgamated company in case of an amalgamation; or
    3. demerged company and the resulting company in case of a demerger.
  6. Where a building, not owned by the assessee, is held on lease or by any other right of occupancy is used for the purposes of business or profession of the assessee, and if any capital expenditure is incurred by the assessee for the purposes of business or profession on construction of any structure or any work by way of renovation, extension or improvement to such building, then such structure or work shall be treated as a building owned by the assessee for the purposes of this section.
  7. The provisions of this section shall apply whether or not the assessee has claimed deduction for depreciation in computing his total income.
  8. In addition to deduction under sub-section (3), additional deduction in respect of depreciation for any new machinery or plant shall be allowed, when—
    1. the assessee is engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power;
    2. the assessee acquires and installs the new machinery or plant;
    3. the new machinery or plant is first put to use by the assessee for the purposes of business; and
    4. the new machinery or plant (not being a ship or an aircraft)—
      1. was not used either within or outside India by any other person before its installation by the assessee;
      2. is not installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
      3. is not in the nature of any office appliances or road transport vehicle; or
      4. is not an asset on which the whole of the actual cost is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income under the head “Profits and gains of business or profession” of any tax year.
  9. The additional deduction in respect of depreciation referred to in sub-section (8) shall be—
    1. 20% of the actual cost of the new machinery or plant in the tax year when it is acquired and put to use, subject to the provisions of clause (b); or
    2. 10% of the actual cost, if the new machinery or plant is acquired and put to use for less than one hundred and eighty days in the relevant tax year, and 10% of the actual cost shall be allowed in the immediately succeeding tax year.
  10. The difference between the written down value and the moneys payable including the scrap value, if any, for any tangible asset in respect of which depreciation is claimed and allowed under sub-section (2), shall be allowed as deduction when—
    1. such asset is sold, discarded, demolished or destroyed in the tax year not being the tax year in which it is first put into use;
    2. the moneys payable including the scrap value, if any, is less than its written down value; and
    3. such deficiency is actually written off in the books of account of the assessee.
    1. Where the profits and gains chargeable for the tax year before allowing the deduction under sub-sections (1) to (10) is less than such allowable deduction, then—
      1. if such profits and gains is not a loss, the deduction under sub-sections (1) to (10) shall be allowed to the extent of the available profits and gains;
      2. if such profits and gains is a loss, no deduction under sub-sections (1) to (10) shall be allowed;
    2. the amount of deduction which has not been allowed under clause (a) shall be added to the allowable deduction under this section, whether available or not, for the succeeding tax year and the total amount shall be deemed to be eligible for deduction in that year, and so on for the succeeding tax years; and
    3. the provisions of this sub-section shall be subject to the provisions of sections 112(3) and 113(4).
  12. For the purposes of this section,—
    1. “assets” mean—
      1. tangible assets, being buildings, machinery, plant or furniture;
      2. intangible assets being—
        1. know-how; or
        2. patents; or
        3. copyrights; or
        4. trademarks; or
        5. licences; or
        6. franchises; or
        7. any other similar business or commercial rights, but not being goodwill of a business or profession;
    2. “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto);
    3. “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or in a scheme of amalgamation of a banking company, as referred to in section 5(c) of the Banking Regulation Act, 1949 (10 of 1949) with a banking institution as referred to in section 45(15) of the said Act, sanctioned and brought into force by the Central Government under section 45(7) of that Act, of any asset by the banking company to the banking institution;
    4. “written down value of the block of assets” shall have the same meaning as in section 41(1)(c).

General conditions for allowable deductions

  1. Any expenditure (not being an expenditure of the nature specified in sections 28 to 33, 44 to 49, 51 and 52 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
  2. For the purposes of sub-section (1), an expenditure laid out or expended wholly and exclusively for business or profession by the assessee shall not include any of the following:—
    1. an expenditure incurred for any purpose which is an offence or is prohibited by law; or
    2. an expenditure incurred on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013); or
    3. an expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party.
  3. The expenditure mentioned in sub-section (2)(a) shall include expenditure incurred for—
    1. any purpose which is an offence under, or is prohibited by, any law in force in or outside India; or
    2. providing a benefit or perquisite in any form to a person, who may or may not be carrying on a business or exercising a profession, when its acceptance by the person is in violation of any law or rule or regulation or guideline governing the conduct of that person; or
    3. compounding an offence under any law in force in or outside India; or
    4. settling proceedings initiated in relation to contravention under any law notified by the Central Government in this behalf.

Amounts not deductible in certain circumstances

  1. any amount on account of—
    1. tax paid on income; or
    2. tax paid by employer referred to in Schedule III (Table: Sl. No. 10); or
    3. tax paid in any other country for which relief is eligible under section 159 or 160,

    and shall include any surcharge or cess on such tax, by whatever name called;

    1. 30% of any sum payable to a resident, on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1), so, however, that—
      1. where in respect of any such sum, tax is deducted in any subsequent year, or is deducted during the tax year but paid after the due date specified in section 263(1), 30% of such sum shall be allowed as a deduction in computing the income of the tax year, in which such tax has been paid;
      2. where the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B on any such sum but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause, the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee referred to in section 398(2);
    2. any interest, royalty, fees for technical services or other sum chargeable under this Act which is payable—
      1. outside India; or
      2. in India to a non-resident (which is not a company) or to a foreign company,

      on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax, has not been deducted or after deduction, has not been paid up to the due date specified in section 263(1), so, however, that —

      1. where in respect of any such sum, tax is deducted in any subsequent year, or is deducted during the tax year but paid after the due date specified in section 263(1), such sum shall be allowed as a deduction in computing the income of the tax year, in which such tax has been paid;
      2. where the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B on any such sum but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee as referred to in section 398(2);
    3. any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source under Chapter XIX-B from any payments made from the fund which are chargeable to tax under the head “Salaries”;
  3. any payment chargeable under the head “Salaries”, payable outside India or to a non-resident on which tax is deductible at source under Chapter XIX-B and such tax has not been deducted or, after deduction, has not been paid;
  4. any amount—
    1. paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or
    2. which is appropriated, directly or indirectly, from,

    a State Government undertaking by the State Government;

  5. the expenditure incurred by a firm, assessable as such—
    1. in the nature of salary, bonus, commission or remuneration, by whatever name called (herein referred as remuneration) to a partner, who is not a working partner; or
    2. on the remuneration to a working partner, and interest to any partner, if it is—
      1. not authorised by the partnership deed applicable for the period for which such remuneration or interest is paid; or
      2. authorised by and is as per the terms of partnership deed but relates to the period prior to the date of such partnership deed, or which was not authorised by the earlier partnership deed; or
    3. on the aggregate remuneration to all working partners as authorised by the partnership deed, exceeding the amount computed as under:—
      1. on the first ` 600000 of the book profit or in case of a loss, ` 300000 or at the rate of 90% of the book profit, whichever is higher;
      2. on the balance of the book profit, at the rate of 60%; or
    4. on interest to any partner as authorised by the partnership deed, exceeding 12% simple interest per annum, so, however, that—
      1. where an individual is a partner in a firm, on behalf, or for the benefit, of any other person (such partner and the other person being herein referred to as “partner in a representative capacity” and “person so represented”, respectively),—
        1. interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;
        2. interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause;
      2. where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person;
    5. in this clause—
      1. “book profit” means the net profit, as shown in the profit and loss account for the relevant tax year, computed as per Chapter IV-D as increased by the aggregate amount of the remuneration to all the partners of the firm, if such amount has been deducted while computing the net profit;
      2. “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;
  6. the expenditure incurred by an association of persons or a body of individuals (other than a company, or a co-operative society or society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India) in the nature of interest, salary, bonus, commission or remuneration, by whatever name called, made to a member of such association or body, provided that—
    1. where the interest has been paid by the association or the body to its member and such member has also paid interest to the association or the body, then only such excess interest, if any, paid by the association or body shall not be allowed under this clause;
    2. where an individual is a member of an association or a body on behalf, or for benefit of any other person, such member and any other person shall be referred as “representative member” and “person so represented”, respectively, then, the provisions of this clause—
      1. shall not be applicable in respect of interest paid to or received from, such individual otherwise than in his capacity as a representative member;
      2. shall be applicable in respect of interest paid to or received from, an individual in his capacity as a representative member and, the person so represented;
      3. shall not be applicable in respect of interest paid to a member, otherwise than as representative member, on behalf or for the benefit of any other person.

Expenses or payments not deductible in certain circumstances.

  1. The provisions of this section shall have effect irrespective of anything to the contrary contained in any other provision of this Act relating to computation of income under the head “Profits and gains of business or profession”.
  2. If the assessee incurs any expenditure for which payment has been or is to be made to any “specified person”, which in the opinion of the Assessing Officer is excessive or unreasonable having regard to the—
    1. fair market value of the goods, services or facilities; or
    2. legitimate needs of the business or profession of the assessee; or
    3. benefit derived by or accruing to the assessee therefrom,

    so much of the expenditure as considered excessive or unreasonable by him shall not be allowed as a deduction.

  3. For the purposes of sub-section (2) and this sub-section,—
    1. “specified person” shall mean the following,—
      1. any person being an individual or company or firm or association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee, or any director, partner, member thereof or any relatives of such individual, director, partner, member or any other company in which the first mentioned company has substantial interest;
      2. a company, firm, association of persons, or Hindu undivided family whose director, partner or member has substantial interest in the business or profession of the assessee, or any director, partner or member thereof and their relatives, as the case may be;
      3. any person carrying on a business or profession, where assessee, being—
        1. an individual or his relative; or
        2. a company, its directors or their relatives; or
        3. a firm, its partners or their relatives; or
        4. an association of persons, its members or their relatives; or
        5. a Hindu undivided family, its members or their relatives,

        has substantial interest in the business or profession of such person;

    2. a person is deemed to have “substantial interest in the business or profession” if—
      1. in a case where the business or profession is carried on by a company, such person is, at any time during the tax year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power; and
      2. in any other case, such person is, at any time during the tax year, beneficially entitled to not less than 20% of the profits of such business or profession.
  4. Where in respect of any expenditure incurred by the assessee, any payment or aggregate of payments made in a day to a person exceeds ` 10000 and is not made through specified banking or online mode, then the expenditure by way of such payments shall not be allowed as a deduction.
  5. Where any deduction was made in any preceding tax year for a liability incurred for any expenditure and payment in respect of such liability is made during a subsequent tax year and if such payment or aggregate of payments made in a day to a person exceeds ` 10000 and is not made through specified banking or online mode, such payment shall be deemed to be the income under the head “Profits and gains of business or profession” in such subsequent tax year.
  6. For the purposes of sub-sections (4) and (5), the figures “` 10000” shall be read as “` 35000” in case the payment is made for plying, hiring or leasing of goods carriages.
  7. The provisions of sub-sections (4) and (5) shall not be applicable in cases and circumstances, as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
  8. Nothing (with reference to mode of payment) contained in any other law in force or in any contract, shall apply in respect of any payment which has been made through specified banking or online mode, in compliance of sub-sections (4) to (7), and no plea shall be allowed to be raised, in any suit or other proceeding on the ground that the payment was not made or tendered in cash or in mode other than through specified banking or online mode.
  9. No deduction or allowance shall be allowed in respect of marked to market loss or other expected loss, except as allowable under section 32(1)(h).

Certain deductions allowed on actual payment basis only.

  1. The sums payable, as specified in sub-section (2), which are otherwise allowable as a deduction under this Act, shall be allowed as a deduction while computing the income chargeable under section 26 only in the tax year in which such sums are actually paid irrespective of—
    1. any provision to the contrary in this Act; or
    2. method of accounting regularly followed; or
    3. the tax year in which the liability was incurred.
  2. The sums payable for the purposes of sub-section (1), shall be—
    1. tax, duty, cess, surcharge or fee, by whatever named called, levied under any law in force;
    2. contribution of the employer to a provident fund or superannuation fund or gratuity fund or any fund for the welfare of employees;
    3. amount payable by employer in lieu of any leave at the credit of the employee;
    4. any sum referred to in section 32(a);
    5. interest on loans or advances or borrowings from specified financial entities as per the terms and conditions of the agreement governing such loans or advances or borrowings;
    6. amount payable to the Indian Railways for use of railway assets; or
    7. amount payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).
  3. In case the amounts specified in sub-section (2), except the sum referred to in clause (g) thereof, are paid after the end of the tax year in which the liability was incurred, but on or before the due date of filing of return of income under section 263(1) for such tax year, the deduction towards such sum shall be allowed in such tax year.
  4. If interest on loans or advances or borrowings specified in sub-section (2)(e) is converted into a loan or advance or debenture or any other instrument by which the liability to pay is deferred to a future date, then it shall not be deemed to have been actually paid.
  5. If a deduction in respect of any sum payable under sub-section (2) has already been allowed in any tax year when such liability was incurred, it shall not be allowed again in any subsequent tax year when it is paid.
  6. The provisions of this section shall not apply to a sum received by the assessee from any employee as contribution towards any of the funds referred to in section 2(49)(o).
  7. For the purposes of this section, “specified financial entities” means a public financial institution or State Financial Corporation or State Industrial Investment Corporation or such class of non-banking financial companies as may be notified by the Central Government or a scheduled bank or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank).
  8. For the purposes of sub-section (2)(a), “the sum payable” means a sum for which the assessee has incurred liability in the tax year even though such sum might not have been payable within that year under the relevant law.

Certain sums deemed as profits and gains of business or profession

  1. The following sums shall be deemed to be profits and gains of business or profession and shall be chargeable to income-tax, in the manner specified below, subject to the provisions of sub-section (2):—
    1. where an allowance or deduction has been allowed in respect of any loss, expenditure or trading liability incurred by the assessee during any tax year, then,—
      1. the value of any benefit accruing to the assessee by way of cessation or remission of such trading liability, including a unilateral act of write-off of such liability in his accounts, in a subsequent tax year in which such benefit accrues; or
      2. any amount obtained by the assessee, whether in cash or otherwise, in respect of such loss or expenditure incurred, in subsequent tax year in which the amount is obtained,

      whether the business or profession in respect of which the allowance or deduction was made is in existence in such subsequent tax year or not;

    2. in a case where any tangible asset [as referred to in section 33(12)(a)(i)], which is owned by assessee, is sold, discarded, demolished or destroyed, and the moneys payable for such asset, together with the scrap value [A] exceeds the written down value of such assets [C], the sum as computed below, in the tax year in which the moneys payable for such asset becomes due—
      1. where the moneys payable for such asset together with the scrap value [A] is less than the actual cost of such asset [B], then—

        [A] – [C]; or

      2. in any other case,—

        [B] – [C];

    3. in a case where an asset representing expenditure of a capital nature on scientific research, referred to in section 45(1)(a)(i) is sold, without having been used for other purposes, and the sale proceeds together with the total deductions allowed under that section exceed the amount of capital expenditure, the excess or the amount of deduction so made, whichever is less, in the tax year in which the asset was sold;
    4. in a case where a deduction has been allowed for a bad debt (or part of it) under the provisions of section 31(2), and any amount subsequently recovered exceeds the difference between such debt and the amount allowed, then the amount in excess, in the tax year in which recovery is made;
    5. in a case where a deduction has been allowed for any special reserve created and maintained under the provisions of section 32(e), any amount subsequently withdrawn from such reserve, in the tax year in which the amount is withdrawn.
  2. The provisions of sub-section (1) shall apply subject to fulfilment of the following conditions:—
    1. in respect of sub-section (1)(a), only when an allowance or deduction has been made in assessment for any tax year towards the trading liability, loss or expenditure incurred;
    2. in respect of sub-section (1)(b), only when the asset owned by the assessee, has been used for the purpose of business or profession, and depreciation has been claimed and allowed thereon under section 33(2);
    3. in respect of sub-section (1)(c), only when the asset has not been used for other purposes.
  3. Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1)(a), (c), (d) or (e), in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the tax year in which it ceased to exist and which could not be set off against any other income of that tax year shall, so far as may be, be set off against the income chargeable to tax under the said clauses of that sub-section.
  4. In respect of sums referred to in sub-section (1)(a), if the benefit referred therein accrues to, or amount referred therein is obtained, by the successor in business, the value of the benefit or the amount shall be chargeable to income-tax as income in the hands of successor in business.
  5. The provisions of sub-section (1)(b), (c), (d) and (e) shall apply in a tax year even if the business is no longer in existence.
  6. For the purposes of this section,—
    1. “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company;
    2. “successor in business” means—
      1. the amalgamated company, where there has been an amalgamation;
      2. the resulting company, where there has been a demerger;
      3. where the assessee is succeeded by any other person in that business or profession, that other person;
      4. where a firm carrying on a business or profession is succeeded by another firm, that other firm.

Computation of actual cost

  1. The actual cost of an asset used for the purposes of the business or profession shall be the actual cost to the assessee, as reduced by the following amounts:—
    1. part of cost of asset, if any, met by any other person or authority, directly or indirectly;
    2. goods and services tax paid in respect of which credit of input tax has been claimed and allowed under the relevant law;
    3. duty of excise or additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944;
    4. subsidy, grant or reimbursement, by whatever name called, if any, relatable to the acquisition of the asset, received, directly or indirectly, by the assessee from—
      1. the Central Government;
      2. a State Government;
      3. any authority established under any law; or
      4. any other person.
  2. The payment or aggregate of payments exceeding ` 10,000 in a day for acquisition of an asset or part thereof, made to a person in a mode otherwise than by specified banking or online mode, shall be excluded from the actual cost of that asset.
  3. In a case where the subsidy, grant or reimbursement referred to in sub-section (1)(d) is not directly relatable to the asset acquired, the amount of reduction under sub-section (1)(d) shall be determined as under:—

     B
    A ×  C

    where,—

    A = total amount of subsidy, grant or reimbursement not directly relatable to the asset;

    B = cost of the asset acquired for which actual cost is to be determined;

    C = cost of all the assets in respect of or in reference to which the subsidy or grant or reimbursement is so received.

  4. In circumstances specified under column B of the Table below, the actual cost of the asset shall be as specified in column C thereof.
  5. Irrespective of anything contained in sub-section (4), other than serial number 8 of the Table in the said sub-section, in a case where the asset is acquired by the assessee, its actual cost shall be such amount as may be determined by the Assessing Officer having regard to all the circumstances of the case, where—
    1. the asset was used by any other person for the purposes of his business, before such acquisition; and
    2. the Assessing Officer is satisfied that the main purpose of the transfer of the asset, directly or indirectly, was to reduce tax liability (by claiming depreciation on enhanced actual cost).
  6. The determination of actual cost under sub-section (5) shall be made with the prior approval of the Joint Commissioner.
  7. For the purposes of this section, “special modes of acquisition” means acquisition—
    1. by way of a gift or will or an irrevocable trust; or
    2. upon distribution on the liquidation of a company; or
    3. by such mode of transfer as is referred to in section 70(1)(a), (c), (d), (e), (j), (zd), (ze) and (zf).

Special provision for computation of cost of acquisition of certain assets

  1. For the purposes of computation of income under the head “Profits and gains of business or profession”, cost of acquisition of an asset which becomes property of—
    1. an amalgamated company under a scheme of amalgamation; or
    2. an assessee, under a gift, or will, or an irrevocable trust, or on total or partial partition of a Hindu undivided family,

    when sold as stock-in-trade shall be the sum of—

    1. cost of acquisition of the said asset in the hands of the amalgamating company in case of clause (a), or the transferor or donor in case of clause (b);
    2. any cost of improvement made;
    3. any expenditure incurred by the amalgamating company or transferor or donor, as the case may be, wholly and exclusively in connection with such transfer.
  2. This section shall not apply to an asset referred to in section 67(6).

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